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Resource Scarcity: Improving microfinance with mental accounting

There is an anomaly in the economic literature called the “flypaper effect” that can be leveraged to help poor people make better investments. To understand what this phenomenon is, consider the food stamp program of the U.S. government. Food stamps are an example of what economists call “in-kind” grants. Basically, it is money that can only be spent on a specific good. When the government gives out food stamps to poor people, it expects that they will now be able to spend their money on other necessities, like paying bills. However, because people view in-kind grants differently than they see an equivalent amount of money, food stamp recipients might actually buy more food than they did before receiving food stamps. This would be an example of the “flypaper effect.” While there are many potential explanations for the flypaper effect, several people, including Richard Thaler, suggest that this may be due to the ways people categorize and make their financial decisions, something called “mental accounting.” ….[READ]